TOKYO -- Overseas investors with no strong interest in Japanese equities are nonetheless increasing their exposure to them, perhaps even unknowingly, through their purchases of exchange-traded funds.
The trend is keeping investors who know the ins and outs of the Japanese market from reaping big gains, says a trader at a foreign brokerage.
Shares lost ground Wednesday after the Nikkei Stock Average's much-anticipated peaking above its previous post-bubble high reached in 1996. Yet Yaskawa Electric, Omron and others that had driven the rally kept rising, with each closing the day up 3%.
The engine behind such sustained momentum is certainly not investors who really know the market here.
"Foreign investors are having a hard time finding a reason to pick up Japanese shares further," says Takaaki Kato of Citigroup Global Markets Japan. Individual companies may offer buy incentives, but the market as a whole lacks a compelling story, these investors reckon. No rising class of growth companies is on the horizon, and corporate governance reform has yet to make significant progress in Japan.
The buy momentum, rather, is fueled by ETFs, which have been funneling in money from foreigners. With ETFs, some investors are "buying Japan without noticing," says Makoto Shiota at Nomura Securities.
Purchases of Japanese equities via ETFs topped $2.4 billion for October, shows an estimate based on inflows and outflows of overseas-traded ETFs and their weightings on Japan, using mutual fund database Morningstar Direct. The aggregate so far this year exceeds an estimated 1 trillion yen ($8.79 billion).
ETFs drawing in especially strong inflows include those that invest in highly competitive developers of robot technology and artificial intelligence.
The Robotics & Artificial Intelligence ETF run by U.S.-based Global X, for instance, has seen its market cap soar to $1.1 billion in just over a year in existence. Its top holdings include U.S. tech company Nvidia as well as Japan's Keyence, Fanuc and Yaskawa Electric; in fact, nearly half of its portfolio targets Japanese stocks.
With Wall Street booming, ETFs eyeing regions outside of the U.S. are thriving as well. Vanguard saw its Total International Stock ETF -- which invests in non-U.S. equities -- reach nearly $9.8 billion in market cap, skyrocketing 50% since the beginning of the year. The figure outpaced the 20% rise in an index that tracks non-U.S. stocks.
Overseas institutional investors tend to buy these ETFs when their exposures to non-U.S. countries drop as a result of a rise in American stocks.